A reader’s concern: Did I manage this iron condor well?



May I ask you to have a look at this "real" life (paper trading portfolio) situation?

In late September (SPY @ 114) I bought the following IC (40 lots): Dec SPY 124/126 C, Dec SPY 101/99 P @0.51 (no commissions included).

In early November (SPY @119), not feeling very comfortable with the rapid rise in SPY, I decided to roll  124/126 to 127/129 at a cost of 0.24. By doing so, my original premium of $2040 was reduced to $1080 (OK it is not important, I just want to mention it.)

Yesterday, I closed the puts 101/99 at a cost of 0.04.

So, I am left with #40 127/129 C. (max possible gain is now $920). Today (SPY @ 119.8), the greeks for my position are: Delta= -133, Gamma= -51, theta= 17, vega= -78 Delta for Dec 127C is 0.06 (very low) I feel comfortable looking at the greeks. But, at the same time, I have no idea where the market is going. SPY has only to rise by 6% (quite probable), in the next 30 days, to reach my short call (127).

If I want to close my position it will cost 0.07. Then, my final profit becomes $640. This is not what I had in mind when I planned the trade. My objective is to close the position once I can achieve 70-80% of the original premium (approx $1450). So, here I am, feeling comfortable on one hand but not feeling "safe" enough on the other hand.

What shall I do? OK, I do not pay attention to profit and I decide to close the position (I think I will sleep better). I will open a new one expiring in February. Obviously, I do not expect you to tell me if I made the right decision or not. But maybe you can comment on my thinking process. My feeling is that I did not manage this trade in the best possible way.



I'm very disappointed in how disappointed you are in what you have done with your position.  I believe you are dissatisfied because you did not achieve the maximum possible result.  You faced some trouble, chose to spend cash to temporarily get out of trouble, and you earned a substantial profit.

Why are you disappointed?   Your trading goal should be to make good risk management decisions at the time that such decisions must be made.  That represents the long-term path to success.

In my opinion, you handled this very well.  I have minor quibbles, but they are minor:

a) You must look at commissionsI think that 40 lots of SPY is too many to trade.  Why not trade 4 SPX spreads and cut trading expenses?

You traded 160 contracts to open; 160 more to roll, 80 more to close and will trade an additional 80 to exit the calls.  How much profit disappears through costs?  You cannot ignore commissions, especially when trading 480 contracts.  With some brokers, that would eat up all the profits – and then some.

Try SPX next time.  Do a 4-lot, 20-point, SPX spread and see how it feels to manage that position.  That's one purpose of paper trading.  It allows you to experiment.


b) You were uncomfortable and reduced risk.  That's good.  You paid a lot for this call roll – approximately half the original cash – but if that's what it takes to get comfortable, then that's what it takes.  Holding positions that you want to own comes first.  Nothing wrong with this trade.

Minor quibble: paying 24 cents is a big cost.  But don't let that prevent you from doing the same thing next time.  The real decision for you was: roll or exit (or reduce size).  You chose the roll.  Very reasonable.

Your short options were still 4% OTM, and for most traders that is too early for rolling.  However, you are not most traders.  You are Dimitris and must satisfy his comfort zone.  It's ok to be conservative.  However, there is a limit.  If you adjust every time the underlying moves 2%, then this is not a good strategy for you.  However, another purpose of paper trading is to get a feel for making adjustments and when to make them. 

I hope you are keeping a journal of your trades – and more importantly – of your thoughts when you make those trades.  Don't forget to include your thoughts when you decide NOT to make an adjustment.

Once you pay this much for the roll, there is no possibility of meeting your original profit objective.  You must come to recognize that this is ok.  Your primary goal is not to incur a large loss.  Your secondary goal is to earn a profit.  Your tertiary goal is to meet your profit objectives – over the longer term.

You are overlooking one substantial point.  Your profit objective, to be kind, is unrealistic.  Surely you do not anticipate earning that profit on a consistent basis.  Your margin requirement was $200 per spread.  And if your broker allows, it was only $149 because you can use the cash from the trade to meet part of that requirement.

If you had been able to earn a 70% profit, that would have been $35 per spread (70% of $51).  That's a profit of more than 23%  (35/151) on your investment in less than two months.  Please tell me that this is not your normal expectation. 23% for a year is a good result, one that is met by very few investors and traders.  To anticipate that result every couple of months, and to be disappointed when you don't earn that much – is… Well, I have no kind words for that.

As it is, a profit of $640 represents more than a 10% profit, or better than 5% per month.  How can you not be happy with that result? Yes, the true gain is much less due to commissions.

When markets are dull, you may earn something near that 20% return for some of your trades. But you will not earn that consistently.  No way.  When the market makes an unfavorable move and your comfort zone (and prudence) dictate making a change to the original position, there is not going to be enough credit remaining to meet your current lofty goals.  And believe it or not, you are going to lose money some months.  If you get overconfident, you may lose a bundle. And quickly.

c) You covered an inexpensive OTM spread.  That's also good.  You paid the equivalent of $0.20 for a 10-point spread.  For December options, I see nothing wrong with that.

What to do now?  That's easy.  Do you want to hold this trade when you can exit at 7 cents?  If yes, hold it and the next decision is just how much to bid.  Then enter the bid.  If you do not want to trade front month options, then look to exit now, on weakness, or on time passage.  Perhaps Monday.

One more quibble:  If the delta is 6, then it is not 'quite probable' that SPY will rise 6%.  It is unlikely, based on statistical analysis. If your gut tells you differently, then go buy that call spread.



I share some lessons learned and some of my philosophy of trading.  eBook. $12

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13 Responses to A reader’s concern: Did I manage this iron condor well?

  1. Dimitris 11/20/2010 at 7:31 AM #

    Thank you very much for your comments. They are very helpful.
    Some more information on your points:
    a. I have tried, in my real portfolio, to trade SPX but on two occasions I had a big problem to close my positions at a reasonable price (near the mid point of bid/ask – and there was a big gap between bid/ask)
    b. I do not want to take extra risks in order to wait until expiration and gain (hopefully) 100% of the premium collected. Therefore, when I make the trade plan, I say that, if I have the opportunity, I will close the position once 70-80% of max profit has been achieved.
    My long time target (when I will be more experienced and better trained) for an annual profit (trading ICs) is 12-16%. (1-1.3% per month).
    As you very correctly said, if I take into account the commissions (about $400 in this case) what is left ($240) is not much, considering that I will lose money in some other months. Hence my disappointment.
    c. I fully agree on what you said for the delta of 6. That is why I was not so sure on what to do. Delta was telling me that I am reasonably safe. But you know better than me that in real life (despite a delta of 6) a move of 6% is quite possible (fat tails?). And with less than 30 days remaining until expiration I was not feeling very comfortable that I could handle the situation once SPY moved upwards 4- 6%.
    Once again, thank you very much for your time and support.

  2. Brian 11/20/2010 at 8:19 AM #

    I found this to be a particularly instructive post. Seeing how someone dealt with real-life adjustment scenarios then seeing your analysis is quite useful (for me anyway). Would love to see more of these from time to time.
    Thanks for providing the analysis.

  3. Jason Prefixed 11/20/2010 at 8:32 AM #

    Mark & Dimitris,
    Thanks for the posts. This type of info really reinforces decisions and thought processes.

  4. Mark Wolfinger 11/20/2010 at 8:09 PM #

    1)SPX is difficult to trade. I gave up quickly. However, I moved to another index, not SPY.
    ‘Reasonable’ is not a well-defined term. You have to see at what price your trade can be made – and whether it’s worse than you are willing to pay. Then compare the cost with commission savings to get an idea of which underlying to trade long term.
    2) Being willing to exit when the 70% (or some different percentage) target is reached is a sound strategy. I agree that exiting early represents good risk management.
    If you meet that target just once per year, and assuming you trade only one position at a time, then your 20% profit is all you need to make your whole year! Even if you invest 75% of your portfolio, that still gives you 15% for the year.
    I’m not suggesting that you go ‘all in’ on a single trade. But, that’s why it’s so important to prevent large losses. You can make your annual goal with one lucky, bigger-sized win, as long as your other results are acceptable: small, solid gains; small losses and no disasters.
    3) Your commissions are good. Other traders pay far more than $400 to trade 480 contracts.
    4) ‘Quite possible’ is different from ‘quite probable.’
    If you ‘fear’ that rally, of course exit by paying 7 cents for the spread.
    There is another point. A 6% probability is not that that much of a long shot. It occurs about one time per 16. Thus, you should not be surprised to see a 6 delta option be ITM at expiration.
    And if you count the times that option moves into the money before finishing OTM, that’s more likely to occur about once in every 8 times. That’s a true risk that cannot be ignored. But, you already know that.
    Thanks for starting this valuable discussion.

  5. Mark Wolfinger 11/20/2010 at 8:10 PM #

    Please feel free to submit a trade, your action, and your question.
    That’s much better than my making up a trade and then following it.

  6. Mark Wolfinger 11/20/2010 at 8:11 PM #

    Glad you found it to be helpful. That’s why we are here.

  7. Brian 11/21/2010 at 8:56 AM #

    Thanks Mark. I’ll take you up on that offer when there is a “fruitful” trade 🙂
    One observation, maybe a topic in itself. I have been trading front month ICs (opening 4-6 weeks out), but at times am finding it too challenging to manage.
    So in Sept I experimented with opening a Dec position (3 mos. out, with similar strikes to Dimitris).
    One thing I noticed is that the theta decay was almost non-existent the first 30 or so days. I could have opened the position 30 days later for almost the same credit. Not sure if this is a usual occurrence or not.
    Also am curious as to why you say that SPX is difficult to trade. I would think that RUT would be more volatile and hence more difficult. (it seems to rise & fall more, %-wise, than SPX)

  8. Mark Wolfinger 11/21/2010 at 10:40 AM #

    Indeed, there is much that I want to say in response. I hope to elaborate in a future post, but next week is already spoken for.
    1) Dec options have time decay. It is not anywhere near zero, nor should it appear to be near zero.
    Here’s one way to see that for yourself. When you look at a 3-month trade (even if it is not a trade you make in real life), also look at the 2-month trade with the same strikes. Then you can compare just how much more slowly the longer-term options decay, when compared with the shorter-term options.
    Be careful to keep an eye on IV for the underlying: VIX or RVX. the longer-term options are more vega dependent, and if IV rises, you may see what appears to be zero time decay. it’s not. It;’s just what can happen when vega affects the option price more than theta. [IV trumps theta]
    2) It’s the negative gamma that makes spreads too challenging to manage efficiently. Longer-term options have less gamma.
    3) I used ‘difficult’ in the context that it is more difficult to ‘trade’ the options at favorable prices. Not in the context of managing the position. Yes, it is a volatile index.

  9. Brian 11/21/2010 at 6:44 PM #

    Thanks for the response. No hurry on a more elaborate post. After I wrote that, while out cycling, it occurred to me that rising IV would explain it. (don’t ask why I was thinking that while cycling)
    If you’re looking for more “topic ideas”, I think one on your experience trading RUT vs. SPX would be interesting also. (assuming you’ve not done this before … I don’t recall seeing it).

  10. Henk Vrielink 11/22/2010 at 8:03 AM #

    Thanks Mark and the other respondents for this valuable information,
    Could you give your thoughts on the following:
    Dimitris started with a Condor 99/101 – 124/126
    He bought 40 lots and got 2040 credit.
    You mentioned commissions.
    He could have started with a 91/101 – 124/134 Condor
    and buy 8 lots for the same margin and 1 fifth the cost. It was done late september.
    I cannot find out how much credit this would generate at that time and what the greeks were.
    Is it a good idea to enlarge the spreads ?

  11. Mark Wolfinger 11/22/2010 at 9:05 AM #

    I’ve never given SPX a chance. I gave up quickly.
    That was a few years ago. Things may be better today.
    Always looking for topics.

  12. Mark Wolfinger 11/22/2010 at 9:12 AM #

    This is a VERY different trade. Thus, it is a good idea ONLY if you want the trade that you described. Most traders will NOT like it.
    Devising a strategy to save money on commissions is not a good idea. Today, commissions are low enough – if you find the right brokers.
    Here is what you need to know: His 2-point wide IC is exactly the same as trading overlapping one point iron condors:
    99/100 put spread plus the 100 /101 put spread.
    124/125 call spread plus 125/126 call spread.
    Yours would be identical to trading 8 overlapping one-point iron condors. That’s a very different beast and includes some very far OTM spreads. For me, this is a bad idea. However, if owning each of those 8 spreads – instead of just one or two appeals to you, then it’s okay.
    But please don’t trade stuff you don’t want to own just to save on commissions. Do you really want to own the 91/92; 133/134 iron condor?

  13. Henk Vrielink 11/22/2010 at 2:03 PM #

    you made your point Mark,
    Of coarse I don’t want to own a 91/92 -133/134 but on the other hand I don’t consider a 2 point as two overlapping one points.
    Until now I evaluated the IC as one position, or as two legs.
    Interesting stuff, Thanks.